National income reflects Australians' capacity to purchase goods and services. It influences material living standards and is also important for other aspects of progress.

About the headline indicator and its limitations: Real net national disposable income per capita

There are many different ways of measuring income. The headline measure has a variety of features that make it an informative indicator of national progress (see box 'Measuring Australia's national income').

The headline indicator exhibits some advantages over other measures of income, but it does not account for everything of importance. National income does not take account of some non-market activities (such as unpaid household work), and the various other factors (such as assets and liabilities) that contribute to material living standards. Although these influences are not built into the headline income measure, commentaries on other progress indicators provide information about some of them.

National income: Other indicators

Real gross domestic product per capita; Real final consumption expenditure per capita; Real household consumption expenditure per capita; Net national saving as a proportion of GDP; Real industry gross value added; Real gross state domestic income per capita; Terms of trade; Population in work;Selected measures of equivalised household disposable income.

Some differences within Australia

The headline indicator, real net national disposable income, is only available at the national level. However, one can look at real gross state domestic income to provide a state-level perspective. Growth in real gross state domestic income per capita was highest in the Northern Territory (3.4% per year) and lowest in Tasmania (2% per year) over the period 1992-93 to 2002-03.

Household income grew for both low and high income households during the late 1990s. But there is evidence to suggest that income grew more quickly for high income households, which may have led to a greater degree of income inequality in Australia in 2000-01 than in 1994-95.

Links to other dimensions

The income dimension of progress is strongly linked to the work dimension. See also the commentaries National wealth, Productivity, Education and training, Health, Financial hardship, The natural landscape, The human environment, International environmental concerns.

Progress and the headline indicator

National income reflects Australia's capacity to purchase goods and services. It influences material living standards and is also important for other aspects of progress.

Australia experienced significant real income growth during the past decade. Between 1992-93 and 2002-03, real net national disposable income per capita grew by around 2.8% a year - appreciably faster than during the preceding twenty-year period.1

The headline indicator exhibits some advantages over other measures of income (see box), but it does not account for everything of importance. National income does not take account of some non-market activities (such as unpaid household work) that contribute to material living standards. Some analysts would prefer an income measure that is adjusted to take account of changes in the value of natural assets, such as increases in value due to technological advances in mining, depletion of resources used in the production process, or environmental degradation from pollution. These influences are not built into the headline income measure, but commentaries on other progress indicators provide some more information.

Not all income is spent on the current consumption of goods and services. Part of income may be used to acquire goods and services for consumption today, or set aside as savings for future consumption. Income that is saved can be used for investment purposes in the form of, say, houses, machinery or financial assets. These assets can directly satisfy individual and societal needs, or can generate future income and support future consumption.

Measuring Australia's national incomeThere are many different ways of measuring income. The headline measure - real net national disposable income per capita - has a variety of features that make it an informative indicator of national rogress.

It is a per capita measure. Total income could rise during periods of population growth, even though there may have been no improvement in Australians' average incomes.

It is a real measure - it is adjusted to remove the effects of price change. Nominal or current price income could rise during periods of inflation, even though there may have been no increase in Australians' real capacity to buy goods and services.

It takes account of income flows between Australia and overseas, and is adjusted for changes in the relative prices of our exports and imports (our 'terms of trade'). These international influences on Australia's income can increase or decrease Australians’ capacity to buy goods and services.

It is a net measure - it takes account of the depreciation of machinery, buildings and other produced capital used in the production process. Hence, it reflects the income Australia can derive today while keeping intact the fixed capital needed to generate future income.

Real net national disposable income per capita(a): longer term view

Real per capita income growth during the past decade has been quite strong. The average annual growth rate (2.8%) since 1993-94 is appreciably above the 1.7% per year recorded since the early 1970s.

A more detailed discussion of consumption and saving follows.

Consumption

If a nation experiences income growth, there may be an increase in consumption or saving or both.

Among the different forms of consumption, final consumption expenditure (FCE) is the most directly relevant to an assessment of progress. FCE is the acquisition of goods and services used for the direct satisfaction of individual or collective wants. It is distinguished from 'intermediate consumption' (the using up of goods and services in the production of other goods and services) and 'consumption of fixed capital' (depreciation).

Consumption grew throughout the 1990s. Between 1992-93 and 2002-03, real FCE per capita rose by almost 2.3% a year.

Real final consumption expenditure(a) per capita

Real household final consumption(a) per capita

1992-93

2002-03

Average annual growth rate

$

$

%

Food

2 130

2 311

0.8

Alcoholic

beverages and tobacco

995

917

–0.8

Clothing and footwear

715

881.0

2.1

Housing, water, electricity, gas and other fuels

3 721

4 575

2.1

Furnishings and household equipment

978

1 275

2.7

Health

915

1 166

2.5

Transport

2 028

2 569

2.4

Communication

253

623

9.4

Recreation and culture

1 710

2 712

4.7

Education services

436

518

1.7

Hotels, cafes and restaurants

1 305

1 681

2.6

Miscellaneous goods and services

2 354

3 062

2.7

Total

17 324

22 291

2.6

(a) Chain volume measures; reference year 2001-02. Components may not sum to totals. Source: Derived from Australian System of National Accounts.1

Both households and governments incur final consumption expenditure. There were some fluctuations in the relative contributions of the two sectors during the past decade, but in both 1992-93 and 2002-03, households accounted for about three-quarters of the total and government for about one-quarter. The government contribution started to decline slightly towards the end of the decade as a result of government policy to reduce the rate of growth of spending in the public sector.

Real per capita household consumption expenditure grew by 2.6% per year between 1992-93 and 2002-03. Household expenditure on communication showed particularly strong growth (an increase of over 9% per year in real per capita terms). This partly reflected increased availability and use of both mobile phones and the Internet. Australians have often been quick to take up new consumer technologies. For more detail, see the commentary Communication.

Household expenditure on recreation and culture also grew strongly (up by 4.7% per year on average).

The share of household expenditure on items that could be considered essential for daily existence (namely, food, clothing, housing and utilities) fell during the past decade (down from 37.9% in 1992-93 to 34.8% in 2002-03), reflecting the increase in real incomes.

Real government consumption expenditure per capita grew by 1.5% a year between 1992-93 and 2002-03. Education and health were among the largest expenditures throughout the decade.

Saving

Saving is one means of funding investment, which is the formation of fixed capital used in the production of goods and services (see the National Wealth chapter for a more detailed discussion of the concept of investment). Income that is saved rather than spent on current consumption can be used to accumulate assets (wealth) that will generate future income and support future consumption.

During the past decade, there was a 2.2 percentage point rise in the ratio of net national saving to GDP (from 0.9% to 3.1%). But the longer term trend has been downward; between 1962-63 and 2002-03 the ratio fell overall from around 9% to about 3%. Similar downward trends in national saving have been observed in some other developed countries, such as the United States of America and the United Kingdom.

There is an important distinction between gross and net national saving (see box). The ratio of depreciation to gross saving has risen during the past forty years - from an average of around 64% in the 1960s to around 83% in 2003. This means that proportionately less of Australia's gross saving has been devoted to increasing the national stock of fixed capital and more to replacing the existing stock. A fuller discussion on capital stock and investment can be found in the commentary National wealth.

Net national saving as a proportion of GDP

Net national saving as a proportion of GDP has fluctuated a good deal during the past decade; between 1992-93 and 2002-03 the ratio rose from 0.9% to around 3.1%. But the longer term trend during much of the past forty years has been downward.1

Measuring national savingSaving cannot be measured directly. It is calculated as a residual item by deducting final consumption expenditure from disposable income. Because it is estimated as the (relatively small) difference between two large national aggregates, saving is subject to any measurement error in or revisions to either aggregate.

Two concepts of national saving are used - gross and net. Gross saving represents the resources available for investment (capital formation) including replacement of fixed capital. Net saving is derived from gross saving by subtracting depreciation (consumption of fixed capital).

National saving and national wealthThe commentary National wealth introduces the concept of net worth (assets less liabilities). Measures of national and sectoral net worth provide an alternative, and in some ways preferable, perspective on how Australia’s future income-generating potential is changing.

Net worth takes account not just of saving out of current income, but also of increases in national assets due to changes in volumes (such as the discovery of mineral deposits) and prices (such as capital gains).

Sectors within a nation can have different saving behaviour, and net national saving can be dissected to show the trends in saving by the following sectors - households, general government and corporations.

Over the longer term (from the 1960s onward), the household sector has been the main contributor to national saving. However, since the early 1970s, the net saving of the household sector relative to GDP has fallen.

The general government sector went from being a net saver during the 1960s to a net dissaver between the 1970s and early 1990s. But during the 1990s, government dissaving was progressively reduced and between 1997-98 and 2002-03 the government sector was again a net saver.

The corporate sector (financial and non-financial corporations) has seen considerable fluctuations in saving since the 1960s. For much of the 1990s, however, the corporate sector has been a net saver.

Net national saving as a proportion of GDP, by sector

Industry output

A strong influence on national income is the production of goods and services. Production can increase if the factors of production - capital and labour and so on - are built up or are used more efficiently.

During the past decade, different industries have exhibited substantially different rates of real output growth. Broadly, many service industries showed stronger growth than most goods-producing industries.

Industry gross value added (IGVA) is the total value of goods and services produced by an industry, after deducting the cost of goods and services used up in the process of production.

Among the industries showing strongest growth in real IGVA between 1992-93 and 2002-03 were Communication services (averaging close to 8% a year), Property and business services, Construction and Wholesale trade (all averaging over 5% a year).

(a) The sum of IGVA across industries differs from GDP to the extent of taxes less subsidies on products. (b) The growth rate has been significantly affected by the drought in the early 2000s.Source: Australian System of National Accounts.1

Some differences within Australia

By state and territory

The headline indicator, real net disposable income per capita, is available only at the national level. To understand some of the trends underlying the national indicator, one can look at state contributions to GDP.

Real gross state domestic income (RGSDI) is the total value of goods and services produced in a state or territory, after deducting the cost of goods and services used up in the process of production and taking into account changes in state terms of trade. The comparable Australian estimate is real gross domestic income.

RGSDI per capita grew in every state and territory between 1992-93 to 2002-03. Growth was strongest in Northern Territory, Western Australia and Victoria (respectively averaging 3.4%, 3.3% and 3.1% per year) and weakest in Tasmania (averaging 2.0% per year). There were wide and persistent disparities in per capita RGSDI levels among the states and territories between 1992-93 and 2002-03. In 2002-03, per capita RGSDI levels ranged roughly between $26,000 and $46,000 (reference year 2002-03), with Tasmania the lowest and the ACT the highest.2

But state disposable incomes (if we could measure them) might not be so diverse, because there are significant transfer payments and other financial flows between states that can moderate the differences. Examples include Commonwealth government taxes and expenditures, and incomes transferred between other states or territories and the rest of the world.

Real gross state domestic income per capita, average annual growth rates - 1992-93 to 2002-03

%

New South Wales

3

Victoria

3.1

Queensland

2.4

South Australia

2.7

Western Australia

3.3

Tasmania

2

Northern Territory

3.4

Australian Capital Territory

2.5

Australia

2.8

Source: Australian National Accounts: State Accounts.2

Household income distribution

While aggregate national income growth is a key element of progress, the distribution of household income (household income is only a part of national income) is also considered by many to be important in determining progress in this dimension.

The table presents information about changes in average disposable income and its distribution among low, middle and high income households. Different households require different amounts of income to maintain the same standard of living: larger households normally need more income than smaller households, and adults need more than children, for example. And so income data have been equivalised to put different households on an equal footing (this is explained in more detail in the Financial hardship commentary).

Between 1994-95 and 2000-01 the average real income of all households increased by 12%. But income grew at different rates for different groups with the average income of high income households growing more quickly than that of low income households. The real income of low income households (i.e. the 20% of people with household incomes between the bottom 10% and the bottom 30% of incomes) increased by 8%, while the real income of middle income and high income groups increased by 11% and 14% respectively. One should remember that these figures are not necessarily tracking changes in the same households over time. For example, some of the households that had a relatively low income in 1994-95 might, through changed circumstances, have income in the middle, say, of the income distribution by 2000-01 (and vice versa).

Various measures of income distribution are included in the table that follows. Percentile ratios are one measure of the spread of incomes across the population. The P90/P10 ratio, for example, is the ratio of income at the 90th percentile (P90) to that at the 10th (P10). Another measure of income distribution is provided by the income shares going to groups of people at different points in the income distribution. The Gini coefficient is a single statistic that lies between 0 and 1 and is a summary indicator of the degree of inequality (values closer to 0 representing a lesser degree of inequality, and values closer to 1 representing greater inequality).

Changes in income distribution measures tend to be relatively small from year to year but trends can emerge over longer time periods. While nearly all the indicators in the table rose over the period 1994-95 to 2000-01, only the increase in the P90/P10 ratio and the decline in the share of total income going to people with low income are sufficiently large to be regarded as statistically significant at the 95% confidence level (that is such differences are, 95 times out of 100, likely to be genuine rather than the result of chance). Meanwhile the change in the Gini coefficient is statistically significant at the 90% level. And so the indicators suggest a possible rise in income inequality over the second half of the 1990s.

Selected measures of equivalised disposable household income(a)

Year(b)

Change 1994-95 to 2000-01

Indicator

Unit

1994-95

1995-96

1996-97

1997-98

1999-00

2000-01

Absolute

%

Mean weekly income for selected groups of people(c)

Low income(d)

$

227

227

235

237

241

245

18

7.9

Middle income(e)

$

372

368

381

388

404

413

41

11

High income(f)

$

792

773

794

832

879

903

111

14

Weekly income at top of selected income percentiles(c)

20th(P20)

$

225.0

224

233

235

241

245

20

8.8

50th(P50)

$

372

367

380

385

405

414

42

11.3

80th(P80)

$

576.0

578

591

602

636

644

68

11.8

Ratios of incomes at top of selected income percentiles

P90/P10

Ratio

3.77

3.74

3.66

3.77

3.89

3.97

0.2

5.3

P80/P20

Ratio

2.56

2.58

2.54

2.56

2.64

2.63

0.07

2.7

P80/P50

Ratio

1.55

1.57

1.56

1.56

1.57

1.56

0.01

0.6

P20/P50

Ratio

0.61

0.61

0.61

0.61

0.59

0.59

–0.02

–0.3

Share of total income received by people with

Low incomes(d)

%

10.8

10.9

11

10.8

10.5

10.5

–0.3

2.8

High incomes(f)

%

37.8

37.3

37.1

37.9

38.4

38.5

0.7

1.9

Gini coefficient(g)

Ratio

0.302

0.296

0.292

0.303

0.31

0.311

0.009

3

(a) See the Financial hardship commentary for a definition of equivalised income. (b) Indicators not available for 1998-99. (c) Adjusted for changes in the Consumer Price Index; values are given in 2000-01 dollars. (d) People in the 2nd and 3rd income deciles after being ranked by their equivalised household income. (e) People in the 5th and 6th deciles after being ranked by their equivalised household income. (f) People in the 9th and 10th deciles after being ranked by their equivalised household income. (g) A summary measure of income distribution between 0 and 1. If the measure approaches the value of 1 income inequality is higher and vice versa.

Source: Data available on request, Surveys of Income and Housing Costs.4

Factors influencing change

The most fundamental influence on income growth is growth in the volume of goods and services produced (real Gross Domestic Product, (GDP)). Between 1992-93 and 2002-03, Australia's real GDP grew by around 46% (averaging growth of 3.8% a year); in the same decade, population grew by around 12% (averaging just under 1.2% a year).

GDP is, in turn, influenced by changes in labour, capital and other inputs to production, and by productivity change. Between 1992-93 and 2002-03, capital services used in market sector production grew by more than 52% (averaging growth of around 4.3% a year). In the same decade, the labour input to market sector production rose by almost 13% (averaging around 1.2% a year).

During the past decade, improvements in productivity (the amount of output per unit of input) have made a strong contribution to GDP growth. Between 1992-93 and 2002-03, market sector multifactor productivity rose by 14% (averaging 1.3% a year).

Domestic production is not the only influence on national income growth. Between 1992-93 and 2002-03, income receivable from overseas rose by more than 86%, while income payable overseas rose just over 100%.

Household consumption expenditure behaviour has changed appreciably throughout the decade - in part reflecting new technologies and the growth in expenditure on some services.

Trends in government consumption have in part reflected policy emphases and some changes in the mix of public and private provision of services.

Both cyclical and behavioural influences can affect national and sectoral savings. For example, the economic cycle has a significant influence on government saving (as outlays tend to rise and receipts tend to fall during an economic downturn). In Australia, the government sector experienced a period of dissaving following the recession in 1991. The rise in government saving in recent years in part reflected sustained economic growth and fiscal consolidation.

Real gross domestic product(a) per capita

Gross Domestic ProductGDP is the total value of goods and services produced in Australia, after deducting the costs of goods and services used up in the production process. The chain volume measure of GDP is an indicator of real growth in Australian production. GDP is a fairly comprehensive measure of economic activity, but does not take account of some non-market activities such as unpaid household work.

As a measure of national progress, GDP is inferior to the headline indicator (net national disposable income) in several ways. The headline indicator takes account of income flows between overseas and Australia and of changes in the terms of trade. Also, it is adjusted for the depreciation of fixed capital used in the production process.

GDP is discussed here because it is possible to dissect it by geography and by industry, to investigate different trends within Australia. Such dissections cannot be done for the headline indicator. Changes in domestic production are among the major driving forces underlying changes in Australia’s incomes. So GDP and the headline indicator exhibit broadly similar trends.

The possible changes to the corporate sector's distribution of profits in the form of dividends during the 1990s may also have influenced saving activity over the last decade.

Changes in rates of inflation can also affect saving rates. A certain amount of saving is required to 'protect' the real value of assets which would otherwise fall due to inflation. In periods of lower inflation - such as the 1990s - less saving might need to be set aside for this purpose.

Domestic economic events are not the only influence on national income. In particular, changes in the relative prices of Australia's exports and imports (the terms of trade) affect real national income.

In recent years, Australia's terms of trade have shown fairly wide oscillations. Overall, between 1992-93 and 2002-03, there was significant improvement, reflecting changes in both the prices and the composition of traded goods and services.

Australia’s terms of trade(a)

Australia’s terms of tradeThe terms of trade index shows the relationship between Australia's export and import prices. A rise in the terms of trade indicates that Australia could purchase a greater volume of imports with a given volume of exports; a fall indicates that a greater volume of exports is required to purchase a given volume of imports.

Imports give the residents of a country access to goods and services that cannot be produced (or cannot be produced as cheaply) in the domestic economy. Exports are one important way of funding purchases of imports and of maintaining levels of domestic production, income and employment. Thus, changes in the terms of trade can affect the volume of goods and services that must be exported to fund a given volume of imports.

The goods and services that make up a country's exports are typically quite different from those that make up its imports - for example, agricultural and mining products account for a fairly large proportion of Australia's exports, whereas manufactured goods and some services account for a large proportion of our imports.

During much of the twentieth century, there has been a general trend toward falling prices of primary commodities (especially agricultural products) relative to other traded goods and services. This reflects both shifts in the composition of worldwide demand and supply, and the effect of improvements in productivity. Around that long-term trend, however, there have been oscillations (each lasting several years) that have reflected short-to-medium run changes in demand and supply conditions. In more recent times, there have been sustained falls in the prices of many manufactured goods, particularly computers and similar goods.

During the period 1992-93 to 2002-03, Australia's terms of trade fluctuated widely, but showed an improvement over the decade (up by 12.6%, reflecting a 12.6% rise in export prices but on average, no change in import prices). The terms of trade started to improve from 1993-94 after experiencing a period of deterioration a few years earlier. However, it again deteriorated in 1998-99 (by 5%), owing largely to fluctuations in import prices. Rising export prices thereafter continued to improve the terms of trade to a level significantly above a decade earlier.1

Population in work(a)

Population in workLooking at the proportion of the population that is employed adds to the information provided by the income and output indicators discussed above.

First, this proportion provides a broad indicator of the degree of economic dependency in Australia - the relative sizes of the total population and of that part of the population engaged in income-generating economic activity. Economic dependency may increase owing to, say, a rise in the number of unemployed or the number of people past retirement age.

Second, because the income of employed people generally exceeds the incomes of those not in employment, this proportion also casts light on trends in the equality of income distribution.

Between 1992-93 and 2002-03, the proportion of the Australian population that was employed rose from 43.6% to 47.9%.3

Links to other dimensions of progress

Australia's national income provides the material basis for many other dimensions of progress. For example, improvements in health and education may rely on expenditures funded out of income - such as the salaries of nurses and teachers, or the construction of hospitals and schools. Conversely, a healthier, more educated population can better engage in the economic activity that generates income.

Income can be spent on protecting or restoring the environment. But income-generating economic activity may also go hand in hand with environmental depletion or degradation. Some of the growth in income may be channelled to the accumulation of national wealth that will generate future income. Or it may be spent to improve the welfare of economically disadvantaged Australians.

The income dimension of progress is strongly linked to work. Changes in income may reflect demographic and labour market trends. Income growth may result partly from a trade-off for longer working hours and reduced leisure.

See also the commentaries National wealth, Productivity, Education and training, Health, Financial hardship, Work,The natural landscape, The human environment, and International environmental concerns.

End notes

1 Unless otherwise indicated, all data in this commentary are derived from Australian Bureau of Statistics 2003, Australian System of National Accounts 2002-03, cat. no. 5204.0, ABS, Canberra.